Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Forward-Looking Statements
This
report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. We have
based these forward-looking statements largely on our current
expectations and projections about future events and financial
trends affecting the financial condition of our business. These
forward-looking statements are subject to a number of risks,
uncertainties and assumptions, including, among other
things:
●
general economic
and business conditions, both nationally and in our
markets;
●
our history of
losses and uncertainty of future profitability;
●
the final outcome
of the CRG litigation in Texas;
●
our ability to
successfully complete research and further development of our drug
candidates;
●
the timing, cost
and uncertainty of obtaining regulatory approvals of our drug
candidates;
●
our ability to
successfully commercialize our drug candidates;
●
our expectations
and estimates concerning future financial performance, financing
plans and the impact of competition;
●
our ability to
raise capital sufficient to fund our development and
commercialization programs;
●
our ability to
implement our growth strategy;
●
anticipated trends
in our business;
●
advances in
technologies; and
●
other risk factors
set forth in this report and detailed in our most recent Annual
Report on Form 10-K and other SEC filings.
In
addition, in this report, we use words such as
“anticipate,” “believe,”
“plan,” “expect,” “future,”
“intend,” and similar expressions to identify
forward-looking statements.
We
undertake no obligation to update publicly or revise any
forward-looking statements, whether as a result of new information,
future events or otherwise after the date of this report. In light
of these risks and uncertainties, the forward-looking events and
circumstances discussed in this report may not occur and actual
results could differ materially from those anticipated or implied
in the forward-looking statements.
The Company
Navidea
Biopharmaceuticals, Inc. (“Navidea,” the
“Company,” or “we”), a Delaware corporation
(NYSE MKT: NAVB), is a biopharmaceutical company focused on the
development and commercialization of precision immunodiagnostic
agents and immunotherapeutics. Navidea is developing multiple
precision-targeted products based on our Manocept™ platform
to enhance patient care by identifying the sites and pathways of
disease and enable better diagnostic accuracy, clinical
decision-making and targeted treatment.
Navidea’s
Manocept platform is predicated on the ability to specifically
target the CD206 mannose receptor expressed on activated
macrophages. The Manocept platform serves as the molecular backbone
of Lymphoseek
®
(technetium Tc
99m tilmanocept) injection, the first product developed and
commercialized by Navidea based on the platform.
On
March 3, 2017, pursuant to an Asset Purchase Agreement dated
November 23, 2016, (the “Purchase Agreement”), the
Company completed its previously announced sale to Cardinal Health
414, LLC (“Cardinal Health 414”) of its assets used,
held for use, or intended to be used in operating its business of
developing, manufacturing and commercializing a product used for
lymphatic mapping, lymph node biopsy, and the diagnosis of
metastatic spread to lymph nodes for staging of cancer (the
“Business”), including the Company’s radioactive
diagnostic agent marketed under the Lymphoseek
®
trademark for
current approved indications by the U.S. Food and Drug
Administration (“FDA”) and similar indications approved
by the FDA in the future (the “Product”), in Canada,
Mexico and the United States (the “Territory”) (giving
effect to the License-Back described below and excluding certain
assets specifically retained by the Company) (the “Asset
Sale”). Such assets sold in the Asset Sale consist primarily
of, without limitation, (i) intellectual property used in or
reasonably necessary for the conduct of the Business, (ii)
inventory of, and customer, distribution, and product manufacturing
agreements related to, the Business, (iii) all product
registrations related to the Product, including the new drug
application approved by the FDA for the Product and all regulatory
submissions in the United States that have been made with respect
to the Product and all Health Canada regulatory submissions and, in
each case, all files and records related thereto, (iv) all related
clinical trials and clinical trial authorizations and all files and
records related thereto, and (v) all right, title and interest in
and to the Product, as specified in the Purchase Agreement (the
“Acquired Assets”).
In
connection with the closing of the Asset Sale, the Company entered
into a License-Back Agreement (the “License-Back”) with
Cardinal Health 414. Pursuant to the License-Back, Cardinal Health
414 granted to the Company a sublicensable (subject to conditions)
and royalty-free license to use certain intellectual property
rights included in the Acquired Assets and owned by Cardinal Health
414 as of the closing of the Asset Sale to the extent necessary for
the Company to (i) on an exclusive basis, subject to certain
conditions, develop, manufacture, market, sell and distribute new
pharmaceutical and other products that are not Competing Products
(as defined in the License-Back), and (ii) on a non-exclusive
basis, develop, manufacture, market, sell and distribute the
Product throughout the world other than in the Territory. Subject
to the Company’s compliance with certain restrictions in the
License-Back, the License-Back also restricts Cardinal Health 414
from using the intellectual property rights included in the
Acquired Assets to develop, manufacture, market, sell, or
distribute any product other than the Product or other product that
(a) accumulates in lymphatic tissue or tumor-draining lymph nodes
for the purpose of (1) lymphatic mapping or (2) identifying the
existence, location or staging of cancer in a body, or (b) provides
for or facilitates any test or procedure that is reasonably
substitutable for any test or procedure provided for or facilitated
by the Product. Pursuant to the License-Back and subject to rights
under existing agreements, Cardinal Health 414 was given a right of
first offer to market, sell and/or market any new products
developed from the intellectual property rights licensed by
Cardinal Health 414 to the Company by the
License-Back.
As part
of the Asset Sale, the Company and Cardinal Health 414 also entered
into ancillary agreements providing for transitional services and
other arrangements. The Company amended and restated its license
agreement with The Regents of the University of California, San
Diego (“UCSD”) pursuant to which UCSD granted a license
to the Company to exploit certain intellectual property rights
owned by UCSD and, separately, Cardinal Health 414 entered into a
license agreement with UCSD pursuant to which UCSD granted a
license to Cardinal Health 414 to exploit certain intellectual
property rights owned by UCSD for Cardinal Health 414 to sell the
Product in the Territory.
In
exchange for the Acquired Assets, Cardinal Health 414 (i) made a
cash payment to the Company at closing of approximately $80.6
million after adjustments based on inventory being transferred and
an advance of $3 million of guaranteed earnout payments as part of
the CRG settlement (described below in Part II, Item 1 –
Legal Proceedings), (ii) assumed certain liabilities of the Company
associated with the Product as specified in the Purchase Agreement,
and (iii) agreed to make periodic earnout payments (to consist of
contingent payments and milestone payments which, if paid, will be
treated as additional purchase price) to the Company based on net
sales derived from the purchased Product subject, in each case, to
Cardinal Health 414’s right to off-set. In no event will the
sum of all earnout payments, as further described in the Purchase
Agreement, exceed $230 million over a period of ten years, of which
$20.1 million are guaranteed payments for the three years
immediately after closing of the Asset Sale. At the closing of the
Asset Sale, $3 million of such earnout payments were advanced by
Cardinal Health 414 to the Company, and paid to CRG as part of the
Deposit Amount paid to CRG (described below in Part II, Item 1
– Legal Proceedings).
Upon
closing of the Asset Sale, the Supply and Distribution Agreement,
dated November 15, 2007 (as amended, the “Supply and
Distribution Agreement”), between Cardinal Health 414 and the
Company was terminated and, as a result, the provisions thereof are
of no further force or effect (other than any indemnification,
payment, notification or data sharing obligations which survive the
termination). At the closing of the Asset Sale, Cardinal Health 414
paid to the Company $1.2 million, as an estimate of the accrued
revenue sharing payments owed to the Company as of the closing
date, net of prior payments.
The
Asset Sale to Cardinal Health 414 in March 2017 significantly
improved our financial condition and our ability to continue as a
going concern. The Company also continues working to establish new
sources of non-dilutive funding, including collaborations and grant
funding that can augment the balance sheet as the Company works to
reduce spending to levels that can be supported by our
revenues.
Other
than Tc 99m tilmanocept, which the Company has a license to
distribute outside of Canada, Mexico and the United States, none of
the Company’s drug product candidates have been approved for
sale in any market.
Product Line Overview
Our
primary development efforts over the last few years have been
focused on diagnostic products, including Lymphoseek which was sold
to Cardinal Health 414 in March 2017, as well as other diagnostic
and therapeutic line extensions based on our Manocept
platform.
The
flexible and versatile Manocept platform acts as an engine for the
design of targeted imaging molecules applicable to a range of
diagnostic modalities, including single photon emission computed
tomography (“SPECT”), positron emission tomography
(“PET”), gamma-scanning (both imaging and topical) and
intra-operative and/or optical-fluorescence detection.
We have
active clinical diagnostic programs in four diseases representing
both major macrophage activation states.
Cardiovascular
Disease (“CV”) – We have completed a nine-subject
study to evaluate diagnostic imaging of emerging atherosclerosis
plaque with the Tc 99m tilmanocept product dosed subcutaneously.
The results of this study were recently published in early release
in the
Journal of Infectious
Diseases
in January 2017, confirming that the Tc 99m
tilmanocept product can both quantitatively and qualitatively
target non-calcified plaque in the aortic arch (NIH/NHLBI Grant 1
R43 HL127846-01). We have applied for follow-on NIH/NHLBI support
to fund additional clinical studies. These studies are currently
under development and design for both Phase 1 and Phase 2
trials.
Rheumatoid
Arthritis (“RA”) – We have initiated two dose
escalation studies in RA. The first study, now complete, included
18 subjects (9 with active disease and 9 controls) who were dosed
subcutaneously with Tc 99m tilmanocept. In addition, based on
completion of extensive preclinical dosing studies pursuant to our
dialog with the FDA, we have initiated and partially completed a
study dosing the Tc 99m tilmanocept product intravenously
(“IV”). These studies have been supported through a
Small Business Innovation Research (“SBIR”) grant
(NIH/NIAMSD Grant 1 R44 AR067583-01A1).
Kaposi’s
Sarcoma (“KS”) – Although we initiated and
completed a study of KS in 2015, we received additional funding
from the National Institutes of Health (“NIH”) in 2016
to continue studies in this disease. The new support not only
continues the imaging of cutaneous elements of this disease but
expands this to imaging of visceral disease via IV administration
of Tc 99m tilmanocept (NIH/NCI 1 R44 CA192859-01A1). Additionally,
we received funding to support the therapeutic initiative for KS
employing the MT-1002 agent under current evaluation. The Company
has already completed a portion of the Phase 1 SBIR portion of this
award (1 R44 CA206788-01).
Colorectal
Cancer ("CRC") and Synchronous Liver Metastases – During the
first quarter of 2017, we initiated an imaging study in subjects
with CRC and liver metastases via IV administration of Tc 99m
tilmanocept. This study will enroll up to 12 subjects with dose
modification. This study is supported through a SBIR grant
(
1 R44
CA1962783-01A1).
Based
on performance in these very large imaging market opportunities the
Company anticipates continued investment in these programs
including initiating studies designed to obtain new approvals for
the Tc 99m tilmanocept product.
The
Company has completed preclinical studies employing both MT
1000-class and 2000-class therapeutic conjugates of Manocept. The
highly positive results from these studies are indicative of
Manocept’s specific targeting supported by its notable
binding affinity to CD206 receptors. This high specificity is a
foundation of the potential for this technology to be useful in
treating diseases linked to the over-activation of macrophages.
This includes various cancers as well as autoimmune, infectious,
CV, and central nervous system (“CNS”) diseases. Our
efforts in this area were further supported by the 2015 formation
of MT, a majority-owned subsidiary that was formed specifically to
explore therapeutic applications for the Manocept
platform.
MT has
been set up to pursue the drug delivery model. This model enables
the Company to leverage its technology over many potential
therapeutic applications and with multiple partners simultaneously
without significant capital outlays. To date, the Company has
developed two lead families of therapeutic products. The MT-1000
class is designed to deplete activated macrophages via apoptosis.
The MT-2000 class is designed to modulate activated macrophages
from a classically activated phenotype to the alternatively
activated phenotype. Both families have been tested in a number of
disease models in rodents.
We
continue to seek to partner or out-license NAV4694. The NAV5001
sublicense was terminated in April 2015.
Tc 99m Tilmanocept – Status in Europe
The
European Commission (“EC”) granted marketing
authorization for Tc 99m tilmanocept in the EU in November 2014. We
recently completed manufacturing validation activities on a
finished drug product contract manufacturing facility to support
the Company’s supply chain, primarily in Europe. This
facility will produce a reduced-mass vial for which we received
approval from the European Medicines Agency (“EMA”) in
September 2016. Our partner, SpePharm AG (an affiliate of Norgine
BV), is currently completing the customary pre-launch market access
activities to support commercial launch in the EU during the first
half of 2017. Following the January 2017 transfer of the Tc 99m
tilmanocept Marketing Authorization to SpePharm, we are in the
process of transferring responsibility for manufacturing the
reduced-mass vial for the EU market to SpePharm.
Manocept Platform - Diagnostics and Therapeutics
Background
Navidea’s
Manocept platform is predicated on the ability to specifically
target the CD206 mannose receptor expressed on activated
macrophages. Activated macrophages play important roles in many
disease states and are an emerging target in many diseases where
diagnostic uncertainty exists. This flexible and versatile platform
serves as an engine for purpose-built molecules that may
significantly impact patient care by providing enhanced diagnostic
accuracy, clinical decision-making, and target-specific treatment.
This disease-targeted drug platform provides the capability to
utilize a breadth of diagnostic modalities, including SPECT, PET,
gamma-scan (both imaging and topical), intra-operative and/or
optical-fluorescence detection, as well as delivery of therapeutic
compounds that target macrophages, and their role in a variety of
immune- and inflammation-based disorders. The FDA-approved sentinel
node/lymphatic mapping agent, Tc 99m tilmanocept, is representative
of the ability to successfully exploit this mechanism to develop
powerful new products.
Impairment
of the macrophage-driven disease mechanisms is an area of
increasing and proven focus in medicine. The number of people
affected by all the inflammatory diseases combined is estimated at
more than 40 million in the United States and perhaps 700 million
worldwide, making macrophage-mediated diseases an area of
remarkable clinical importance. There are many recognized disorders
having macrophage involvement, including RA,
atherosclerosis/vulnerable plaque, nonalcoholic steatohepatitis
(“NASH”), inflammatory bowel disease, systemic lupus
erythematosus, KS, and others that span clinical areas in oncology,
autoimmunity, infectious diseases, cardiology, CNS diseases, and
inflammation.
Manocept Platform – Immuno-Diagnostics Clinical
Data
Rheumatoid Arthritis
In
conjunction with the agreed submission of an investigational new
drug ("IND") amendment for IV administration of tilmanocept to the
FDA, we initiated a multi-center Phase 1/2 registrational trial
employing IV administration to evaluate tilmanocept for the primary
diagnosis of RA and to aid in the differential diagnosis of RA from
other types of inflammatory arthritis. The first subject was dosed
and imaged in February 2017. This study will enroll up to 30
subjects with dose escalation (ClinicalTrials.gov
Identifier:NCT02865434; Study supported by NIH/NIAMSD Grant 1 R44
AR067583-01A1).
Cardiovascular Disease
Results
of our studies to date (ClinicalTrials.gov Identifier:NCT02542371)
provide strong evidence of the potential of Tc 99m tilmanocept to
accumulate in high risk morphology plaques, the ability to make
preliminary comparisons of aortic Tc 99m tilmanocept uptake by
SPECT/CT in clinically symptomatic patients vs. healthy age-matched
subjects, and to evaluate the ability of Tc 99m tilmanocept to
identify the same aortic atherosclerotic plaques that are
identified by contrast enhanced coronary computed tomography
angiography and/or PET/CT.
Other Immuno-Diagnostic Applications
The
Company has received an award for a Fast Track SBIR grant providing
for up to $1.8 million from the NIH’s National Cancer
Institute to fund preclinical studies examining the safety of IV
injection of Tc99m tilmanocept, a Manocept platform product,
followed by a clinical study providing the initial evaluation of
the safety and efficacy of SPECT imaging studies with IV Tc99m
tilmanocept to identify and quantify both skin- and
organ-associated KS lesions in human patients. The grant is awarded
in two parts with the potential for total grant money of up to $1.8
million over two and a half years. The first six-month funding
segment of $300,000, which has already been awarded, is expected to
enable Navidea to secure necessary collaborations and Institutional
Review Board approvals. The second funding segment could provide
for up to an additional $1.5 million to be used to accrue
participants, perform the Phase 1/2 study and perform data analyses
to confirm the safety and effectiveness of intravenously
administered Tc99m tilmanocept. We have received IRB approval of
the clinical protocol, and we plan to initiate a Phase 1/2 clinical
study in KS during 2017.
Macrophage Therapeutics Background
MT has
developed processes for producing the first two therapeutic
Manocept immuno-constructs, MT-1002, designed to specifically
target and kill activated CD206+ macrophages by delivering
doxorubicin, and MT-2002, designed to inhibit the inflammatory
activity of activated CD206+ macrophages by delivering a potent
anti-inflammatory agent. MT has contracted with independent
facilities to produce sufficient quantities of the MT-1002 and
MT-2002 agents along with the concomitant analytical standards, to
provide material for planned preclinical animal studies and future
clinical trials.
Manocept Platform – Immunotherapeutics In-Vitro and
Pre-Clinical Data
The
novel MT-1002 construct is designed to specifically deliver
doxorubicin, a chemotoxin, which can kill KS tumor cells and their
tumor-associated macrophages potentially altering the course of
cancer. KS is a serious and potentially life threatening illness in
persons infected with HIV and the third leading cause of death in
this population worldwide. The prognosis for patients with KS is
poor with high probabilities for mortality and greatly diminished
quality of life. The funds for this Fast Track grant will be
released in three parts, which together have the potential to
provide up to $1.8 million in resources over 2.5 years with the
goal of completing an IND submission for a Manocept construct
(MT-1000 class of compounds) consisting of tilmanocept linked to
doxorubicin for the treatment of KS. The first part of the grant
will provide $232,000 to support analyses including in vitro and
cell culture studies and will be followed by Part 2 and 3 animal
testing studies. If successful, the information from these studies
will be combined with other information in an IND application that
will be submitted to the FDA requesting permission to begin testing
the compound selected in human KS patients.
Navidea
and MT continue to evaluate emerging data in other disease states
to define areas of focus, development pathways and partnering
options to capitalize on the Manocept platform, including ongoing
studies in KS, RA and infectious diseases. The immuno-inflammatory
process is remarkably complex and tightly regulated with indicators
that initiate, maintain and shut down the process. Macrophages are
immune cells that play a critical role in the initiation,
maintenance, and resolution of inflammation. They are activated and
deactivated in the inflammatory process. Because macrophages may
promote dysregulation that accelerates or enhances disease
progression, diagnostic and therapeutic interventions that target
macrophages may open new avenues for controlling inflammatory
diseases. There can be no assurance that further evaluation or
development will be successful, that any Manocept platform product
candidate will ultimately achieve regulatory approval, or if
approved, the extent to which it will achieve market
acceptance.
Navidea
and MT have already reported on the peripheral infectious disease
aspects of KS, including HIV and HHV8 (CROI, Boston 2016, and KS
HHV8 Summit Miami 2015). As noted Navidea and MT continue this work
funded by the NIH/NIAID and NCI.
Nonalcoholic fatty liver disease (“NAFLD”) is a
spectrum of liver disorders and is defined by the presence of
steatosis in more than 5% of hepatocytes with little or no alcohol
consumption. Nonalcoholic steatohepatitis (“NASH”) is
the most extreme form of NAFLD. A major characteristic of NASH
involves cells undergoing lipotoxicity, releasing endogenous
signals prompting the accumulation of various macrophages to assess
the damage. Studies have shown that levels of endogenous molecular
inflammatory signals positively correlate with inflammation,
hepatocyte ballooning, and other NAFLD symptoms. Navidea and MT
have developed a molecular delivery technology capable of targeting
only the disease-causing macrophages by selectively binding to the
CD206 receptor. Selective binding and efficient delivery of this
agent mitigates the potential of affecting the neighboring cells or
interfering more broadly with the normal function of the immune
system.
We have completed three in vivo studies employing our MT-1002 and
MT-2002 Manocept conjugates in a well-established mouse model of
NAFLD/NASH and liver fibrosis. The NALFD scores, which correlate to
the agents’ effectiveness, were significantly reduced, with
all the activity related to inflammation and
“ballooning” scores. Fibrosis decreased significantly
vs. control in the later dosing arm of the study. Liver weights
were not different during any phase of the study between control
and agent-treated groups, nor was there any evidence of damage to
the roughly 30% of the liver made up of un-activated macrophages
called Kupffer cells. MT-1002 and MT-2002 both significantly
reduced key disease assessment parameters in the in vivo
STAM
TM
NASH model. We believe these agents
present themselves as potential clinically effective candidates for
further evaluation. We continue to use this model to further assess
the activity of our agents.
Navidea and MT have already reported on the peripheral infectious
disease aspects of KS, including HIV and HHV8 (CROI, Boston 2016,
and KS HHV8 Summit Miami 2015). As noted Navidea and MT continue
this work funded by the NIH/NIAID and NCI.
We have
completed a series of predictive in vitro screening tests of the
MT-1002 and MT-2002 therapeutic conjugates against the Zika and
Dengue viruses, which included infectivity and viral replication
inhibition effectiveness as well as dose finding studies and
mechanisms of action, the latter based on conjugate
structures. We have also completed a series of predictive in
vivo screening tests of the MT-1002 and MT-2002 therapeutic
conjugates against Leishmaniosis, which included host cell
targeting and killing effectiveness as well as dose finding studies
and mechanisms of action. The results from these evaluations
were positive and have provided a basis for moving forward with in
vivo testing of the selected conjugates. We have selected a
collaborator for these in vivo studies, which will take place over
the next four months. We will provide updates as information
becomes available on future testing.
NAV4694 (Candidate for Divestiture)
NAV4694
is a fluorine-18 (“F-18”) labeled PET imaging agent
being developed as an aid in the imaging and evaluation of patients
with signs or symptoms of Alzheimer’s disease
(“AD”) and mild cognitive impairment
(“MCI”). NAV4694 binds to beta-amyloid deposits in the
brain that can then be imaged in PET scans. Amyloid plaque
pathology is a required feature of AD and the presence of amyloid
pathology is a supportive feature for diagnosis of probable AD.
Patients who are negative for amyloid pathology do not have AD.
NAV4694 has been studied in rigorous pre-clinical studies and
clinical trials in humans. Clinical studies through Phase 3 have
included subjects with MCI, suspected AD patients, and healthy
volunteers. Results suggest that NAV4694 has the potential ability
to image patients quickly and safely with high sensitivity and
specificity.
In May
2014, the Board of Directors made the decision to refocus the
Company's resources to better align the funding of our pipeline
programs with the expected growth in Tc 99m tilmanocept revenue.
This realignment primarily involved reducing our near-term support
for our neurological product candidates, including NAV4694, as we
sought a development partner or partners for these programs. The
Company is currently engaged in discussions related to the
potential partnering or divestiture of NAV4694. We continue to have
active interest from potential partners or acquirers; however, our
negotiations have experienced delays due in large part to
litigation brought by one of the potential partners. The Company
believed the suit was without merit and filed a motion to dismiss
the action. In September 2016, the court determined that there was
enough evidence to proceed with the case and denied Navidea’s
motion to dismiss. Navidea is currently preparing for a trial which
is expected to take place within the next twelve months. At this
time it is not possible to determine with any degree of certainty
the ultimate outcome of this legal proceeding, including making a
determination of liability.
NAV5001 (In-License Terminated)
NAV5001
is an iodine-123 (I-123) labeled SPECT imaging agent being
developed as an aid in the diagnosis of Parkinson’s disease
(PD) and other movement disorders, with potential use as a
diagnostic aid in dementia. The agent binds to the dopamine
transporter (DAT) on the cell surface of dopaminergic neurons in
the striatum and substantia nigra regions of the brain. Loss of
these neurons is a hallmark of PD. In addition to its potential use
as an aid in the differential diagnosis of PD and movement
disorders, NAV5001 may also be useful in the diagnosis of Dementia
with Lewy Bodies, one of the most common forms of dementia after
AD.
In May
2014, the Board of Directors made the decision to refocus the
Company's resources to better align the funding of our pipeline
programs with the expected growth in Lymphoseek revenue. This
realignment primarily involved reducing our near-term support for
our neurological product candidates, including
NAV5001.
In
April 2015, the Company entered into an agreement with Alseres to
terminate the sub-license agreement dated July 31, 2012 for
research, development and commercialization of NAV5001. Under the
terms of this agreement, Navidea transferred all regulatory,
clinical and manufacturing-related data related to NAV5001 to
Alseres. Alseres agreed to reimburse Navidea for any incurred
maintenance costs of the contract manufacturer retroactive to March
1, 2015. In addition, Navidea has supplied clinical support
services for NAV5001 on a cost-plus reimbursement basis. However,
to this point, Alseres has been unsuccessful in raising the funds
necessary to restart the program and reimburse Navidea. As a
result, we have taken steps to end our obligations under the
agreement and notified Alseres that we consider them in breach of
the agreement. We are in the process of trying to recover the funds
we expended complying with our obligations under the termination
agreement.
Outlook
Our
operating expenses in recent years have been focused primarily on
support of Tc 99m tilmanocept, our Manocept platform, and NAV4694
and NAV5001 product development. We incurred approximately $8.9
million, $12.8 million and $16.8 million in total on research and
development activities during the years ended December 31, 2016,
2015 and 2014, respectively. Of the total amounts we spent on
research and development during those periods, excluding costs
related to our internal research and development headcount and our
general and administrative staff which we do not currently allocate
among the various development programs that we have underway, we
incurred out-of-pocket charges by program as follows:
|
Three Months Ended
March 31,
|
Development Program
(a)
|
|
|
Lymphoseek
|
$
241,687
|
$
585,195
|
Manocept
Platform
|
318,688
|
153,841
|
Macrophage
Therapeutics
|
252,073
|
187,583
|
NAV4694
(b)
|
(553,743
)
|
564,558
|
NAV5001
|
—
|
54,424
|
(a)
Amounts reflect
projects included in discontinued operations in the consolidated
statements of operations. Certain development program expenditures
were offset by grant reimbursement revenues totaling $556,000 and
$608,000 during the three-month periods ended March 31, 2017
and 2016, respectively.
(b)
Changes in cost
estimates resulted in the reversal of certain previously accrued
expenses related to the NAV4694 development program during the
three-month period ended March 31, 2017.
We
expect to continue the advancement of our efforts with our Manocept
platform during 2017. The divestiture of NAV5001 and the suspension
of active patient accrual in our NAV4694 trials have decreased our
development costs over the past year, however, we continue to incur
costs to maintain the trials while we complete our
partnering/divestiture activities. We expect our total research and
development expenses, including both out-of-pocket charges as well
as internal headcount and support costs, to be lower in 2017 than
in 2016. This estimate excludes charges related to our subsidiary,
Macrophage Therapeutics, Inc., which are currently to be funded
separately.
Tc 99m
tilmanocept is approved by the EMA for use in imaging and
intraoperative detection of sentinel lymph nodes draining a primary
tumor in adult patients with breast cancer, melanoma, or localized
squamous cell carcinoma of the oral cavity in the EU. There can be
no assurance that Tc 99m tilmanocept will achieve regulatory
approval in any other market outside the EU, or if approved in
those markets, that it will achieve market acceptance in the EU or
any other market.
We
anticipate that we will incur costs related to supporting our
product, regulatory, manufacturing and commercial activities
related to the potential marketing registration and sale of Tc 99m
tilmanocept in the EU and other markets. We continue to evaluate
existing and emerging data on the potential use of Manocept-related
agents in the diagnosis and disease-staging of disorders in which
macrophages are involved, such as KS, RA, vulnerable
plaque/atherosclerosis, TB and other disease states, to define
areas of focus, development pathways and partnering options to
capitalize on the Manocept platform. We will also be evaluating
potential funding and other resources required for continued
development, regulatory approval and commercialization of any
Manocept platform product candidates that we identify for further
development, and potential options for advancing development. There
can be no assurance that further evaluation or development will be
successful, that any Manocept platform product candidate will
ultimately achieve regulatory approval, or if approved, the extent
to which it will achieve market acceptance.
Discontinued Operations
In
March 2017, Navidea completed the Asset Sale to Cardinal Health
414, as discussed previously under “The Company.” In
exchange for the Acquired Assets, Cardinal Health 414 (i) made a
cash payment to the Company at closing of approximately $80.6
million after adjustments based on inventory being transferred and
an advance of $3 million of guaranteed earnout payments as part of
the CRG settlement, (ii) assumed certain liabilities of the Company
associated with the Product as specified in the Purchase Agreement,
and (iii) agreed to make periodic earnout payments (to consist of
contingent payments and milestone payments which, if paid, will be
treated as additional purchase price) to the Company based on net
sales derived from the purchased Product subject, in each case, to
Cardinal Health 414’s right to off-set. In no event will the
sum of all earnout payments, as further described in the Purchase
Agreement, exceed $230 million over a period of ten years, of which
$20.1 million are guaranteed payments for the three years
immediately after closing of the Asset Sale. At the closing of the
Asset Sale, $3 million of such earnout payments were advanced by
Cardinal Health 414 to the Company, and paid to CRG as part of the
Deposit Amount paid to CRG.
We
recorded a net gain on the sale of the Business of $88.7 million
for the three months ended March 31, 2017, including $16.5 in
guaranteed consideration, which was discounted to the present value
of future cash flows. The proceeds were offset by $3.3 million in
estimated fair value of warrants issued to Cardinal Health 414,
$2.0 million in legal and other fees related to the sale, $800,000
in net balance sheet dispositions and write-offs, and $4.6 million
in estimated taxes. Our consolidated balance sheets and statements
of operations have been reclassified, as required, for all periods
presented to reflect the Business as a discontinued operation. Cash
flows associated with the operation of the Business have been
combined with operating, investing and financing cash flows, as
appropriate, in our consolidated statements of cash
flows.
Results of Operations
This
discussion of our Results of Operations focuses on describing
results of our operations as if we had not operated the
discontinued operations discussed above during the periods being
disclosed. In addition, since our remaining pharmaceutical product
candidates are not yet generating commercial revenue, the
discussion of our revenue focuses on the grant and other revenue
and our operating variances focus on our remaining product
development programs and the supporting general and administrative
expenses.
Three Months Ended March 31, 2017 and 2016
Tc 99m Tilmanocept License Revenue.
During the first quarter
of 2016, we recognized $254,000 of the $2.0 million non-refundable
upfront payment received by the Company related to the Tc 99m
Tilmanocept license and distribution agreement for Europe, which
the Company was recognizing on a straight-line basis over two
years. No license revenue was recognized during the first quarter
of 2017.
Grant and Other Revenue.
During the first quarter of 2017,
we recognized $580,000 of grant and other revenue as compared to
$686,000 in the first quarter of 2016. Grant revenue during the
first quarter of 2017 was primarily related to SBIR grants from the
NIH supporting Manocept and Tc 99m Tilmanocept development. Grant
revenue during the first quarter of 2016 was primarily related to
SBIR grants from the NIH supporting NAV4694, Tc 99m Tilmanocept and
Manocept development.
Research and Development Expenses.
Research and development
expenses decreased $1.4 million, or 66%, to $705,000 during the
first quarter of 2017 from $2.1 million during the same period in
2016. The decrease was primarily due to net decreases in drug
project expenses related to (i) decreased NAV4694 development costs
of $1.1 million including decreased manufacturing-related
activities, clinical trial costs and licensing costs while we
continued our efforts to divest the program; (ii) decreased Tc 99m
Tilmanocept development costs of $178,000 including decreased
regulatory costs, manufacturing-related activities and preclinical
testing; and (iii) decreased NAV5001 development costs of $54,000
including decreased manufacturing-related activities and clinical
trial costs; offset by (iv) increased Manocept development costs of
$165,000 including increased clinical trial costs, offset by
decreased pre-clinical testing; and (v) increased therapeutics
development costs of $64,000 including increased
manufacturing-related activities and preclinical testing, offset by
decreased consulting costs. The net decrease in research and
development expenses also included decreased compensation including
incentive-based awards and other expenses related to net decreased
headcount of $247,000.
Selling, General and Administrative Expenses.
Selling,
general and administrative expenses increased $389,000, or 15%, to
$3.0 million during the first quarter of 2017 from $2.6 million
during the same period in 2016. The net increase was primarily due
to increased legal and professional services of $579,000, offset by
decreased costs for investor relations services of $104,000 coupled
with decreased general and administrative headcount of
$97,000.
Other Income (Expense).
Other expense, net, was $1.2 million
during the first quarter of 2017 as compared to other income, net
of $1.1 million during the same period in 2016. We recorded a loss
on extinguishment of the CRG debt of $1.3 million during the first
quarter of 2017. Also during the first quarter of 2017, we
recognized interest income of $30,000 related to the guaranteed
consideration due from Cardinal Health 414, which was discounted to
present value at the closing date of the Asset Sale. For the first
quarters of 2017 and 2016, we recorded non-cash income of $140,000
and $1.1 million, respectively, related to changes in the estimated
fair value of financial instruments.
Liquidity and Capital Resources
Cash
balances increased to $13.4 million at March 31, 2017 from $1.5
million at December 31, 2016. The net increase was primarily due to
net cash received for the Asset Sale to Cardinal Health 414, offset
by payments made on the CRG and Platinum debts coupled with cash
used to fund our operations.
All of
our material assets were pledged as collateral for our borrowings
under the CRG Loan Agreement. In addition to the security interest
in our assets, the CRG Loan Agreement carried covenants that
imposed significant requirements on us. An event of default
entitled CRG to accelerate the maturity of our indebtedness,
increase the interest rate from 14% to the default rate of 18% per
annum, and invoke other remedies available to it under the loan
agreement and the related security agreement.
As
previously described, on March 3, 2017, the Company entered into a
Global Settlement Agreement with MT, CRG, and Cardinal Health 414
to effectuate the terms of a settlement previously entered into by
the parties on February 22, 2017. In accordance with the Global
Settlement Agreement, on March 3, 2017, the Company repaid $59
million of its alleged indebtedness and other obligations
outstanding under the CRG Term Loan. Concurrently with payment of
the Deposit Amount, CRG released all liens and security interests
granted under the CRG Loan Documents and the CRG Loan Documents
were terminated and are of no further force or effect; provided,
however, that, notwithstanding the foregoing, the Company and CRG
agreed to continue with their proceeding pending in The District
Court of Harris County, Texas to fully and finally determine the
Final Payoff Amount. The Texas hearing is currently set for July 3,
2017.
In
addition, the Platinum Loan Agreement carries standard
non-financial covenants typical for commercial loan agreements that
impose significant requirements on us. Our ability to comply with
these provisions may be affected by changes in our business
condition or results of our operations, or other events beyond our
control. The breach of any of these covenants would result in a
default under the Platinum Loan Agreement, permitting Platinum to
accelerate the maturity of the debt. Such actions by Platinum could
materially adversely affect our operations, results of operations
and financial condition, including causing us to curtail our
product development activities. We are currently in compliance with
all covenants under the Platinum Loan Agreement.
In
connection with the closing of the Asset Sale to Cardinal Health
414, the Company repaid to PPCO an aggregate of approximately $7.7
million in partial satisfaction of the Company’s liabilities,
obligations and indebtedness under the Platinum Loan Agreement
between the Company and Platinum-Montaur, which, to the extent of
such payment, were transferred by Platinum-Montaur to PPCO. The
Company was informed by PPVA that it was the owner of the balance
of the Platinum-Montaur loan. Such balance of approximately $1.9
million was due upon closing of the Asset Sale but withheld by the
Company and not paid to anyone as it is subject to competing claims
of ownership by both Dr. Michael Goldberg, the Company’s
President and Chief Executive Officer, and PPVA.
As of
March 31, 2017, the outstanding principal balance of the Platinum
Note was approximately $1.9 million.
Following
the completion of the Asset Sale to Cardinal Health 414 and the
repayment of a majority of our indebtedness, we believe that
substantial doubt about the Company’s financial position and
ability to continue as a going concern has been alleviated.
Although we could still be required to pay up to an additional $7
million to CRG depending upon the outcome of the Texas litigation,
the Company’s management believes that the Company will be
able to continue as a going concern for at least twelve months
following the issuance of this Quarterly Report on Form
10-Q.
Operating Activities.
Cash provided by operations was $66.3
million during the first quarter of 2017 compared to $1.7 million
used during the same period in 2016.
In
connection with the Asset Sale, Cardinal Health 414 (i) made a cash
payment to the Company at closing of approximately $80.6 million
after adjustments based on inventory being transferred and an
advance of $3 million of guaranteed earnout payments as part of the
CRG settlement, (ii) assumed certain liabilities of the Company
associated with the Product as specified in the Purchase Agreement,
and (iii) agreed to make periodic earnout payments (to consist of
contingent payments and milestone payments which, if paid, will be
treated as additional purchase price) to the Company based on net
sales derived from the purchased Product subject, in each case, to
Cardinal Health 414’s right to off-set. In no event will the
sum of all earnout payments, as further described in the Purchase
Agreement, exceed $230 million over a period of ten years, of which
$20.1 million are guaranteed payments for the three years
immediately after closing of the Asset Sale. At the closing of the
Asset Sale, $3 million of such earnout payments were advanced by
Cardinal Health 414 to the Company, and paid to CRG as part of the
Deposit Amount paid to CRG.
We
recorded a net gain on the sale of the Business of $88.7 million
for the three months ended March 31, 2017, including $16.5 in
guaranteed consideration, which was discounted to the present value
of future cash flows. The proceeds were offset by $3.3 million in
estimated fair value of warrants issued to Cardinal Health 414,
$2.0 million in legal and other fees related to the sale, $800,000
in net balance sheet dispositions and write-offs, and $4.6 million
in estimated taxes.
Accounts
and other receivables increased to $7.2 million at March 31, 2017
from $203,000 at December 31, 2016, primarily related to the
current portion of the guaranteed earnout due from Cardinal, which
was discounted and recorded at present value.
Inventory
levels decreased to less than $1,000 at March 31, 2017 from $96,000
at December 31, 2016, primarily due to the use of materials for
European manufacturing development and production. We expect
inventory levels to remain minimal during the remainder of 2017 as
we transition European manufacturing to our distribution
partner.
Prepaid
expenses and other current assets increased to $1.1 million at
March 31, 2017 from $842,000 at December 31, 2016, primarily due to
additional prepaid insurance and legal retainers, offset by normal
amortization of prepaid insurance.
Accounts
payable decreased to $3.1 million at March 31, 2017 from $5.2
million at December 31, 2016, primarily driven by net decreased
payables due to legal and professional services, NAV4694,
regulatory and operations vendors, offset by net increased payables
due to MT vendors. Accrued liabilities and other current
liabilities decreased to $1.2 million at March 31, 2017 from $7.9
million at December 31, 2016, primarily driven by decreased
accruals for interest, bonuses, NAV4694, legal and professional
services, and Macrophage Therapeutics costs, offset by increased
accruals for Manocept development costs. Our payable and accrual
balances will continue to fluctuate but will likely decrease
overall as we continue to decrease our level of development
activity related to NAV4694, offset by planned increases in
development activity related to the Manocept platform.
Assets
associated with discontinued operations decreased to $0 at March
31, 2017 from $3.2 million at December 31, 2016, and liabilities
associated with discontinued operations decreased to $3.6 million
at March 31, 2017 from $4.9 million at December 31, 2016. Decreases
in both assets and liabilities associated with discontinued
operations were primarily due to the Asset Sale to Cardinal Health
414 in March 2017.
Investing Activities.
Investing activities used $0 during
the first quarter of 2017 compared to $2,000 during the same period
in 2016. Capital expenditures of $2,000 during the first quarter of
2016 were primarily for computer equipment. We expect our overall
capital expenditures for the remainder of 2017 will be higher than
for the same period in 2016 related to our planned office
move.
Financing Activities.
Financing activities used $54.4
million during the first quarter of 2017 compared to $1,000 during
the same period in 2016. The $54.4 million used by financing
activities in the first quarter of 2017 consisted primarily of
principal payments on the CRG and Platinum notes payable of $59.5
million, offset by the release of restricted cash of $5.0 million
and proceeds from issuance of common stock of $54,000.
Capital Royalty Group Debt
On
March 3, 2017, the Company entered into a Global Settlement
Agreement with MT, CRG, and Cardinal Health 414 to effectuate the
terms of a settlement previously entered into by the parties on
February 22, 2017. In accordance with the Global Settlement
Agreement, on March 3, 2017, the Company repaid $59 million of its
alleged indebtedness and other obligations outstanding under the
CRG Term Loan. Concurrently with payment of the Deposit Amount, CRG
released all liens and security interests granted under the CRG
Loan Documents and the CRG Loan Documents were terminated and are
of no further force or effect; provided, however, that,
notwithstanding the foregoing, the Company and CRG agreed to
continue with their proceeding pending in The District Court of
Harris County, Texas to fully and finally determine the actual
amount owed by the Company to CRG under the CRG Loan Documents. The
Company and CRG further agreed that the Final Payoff Amount would
be no less than $47 million and no more than $66 million. In
addition, concurrently with the payment of the Deposit Amount and
closing of the Asset Sale, (i) Cardinal Health 414 posted a $7
million letter of credit in favor of CRG (at the Company’s
cost and expense, deducted from the closing proceeds paid to the
Company, and subject to Cardinal Health 414’s indemnification
rights under the Purchase Agreement) as security for the amount by
which the High Payoff Amount exceeds the Deposit Amount in the
event the Company is unable to pay all or a portion of such amount,
and (ii) CRG posted a $12 million letter of credit in favor of the
Company as security for the amount by which the Deposit Amount
exceeds the Low Payoff Amount. If, on the one hand, it is finally
determined by the Texas Court that the amount the Company owes to
CRG under the Loan Documents exceeds the Deposit Amount, the
Company will pay such excess amount, plus the costs incurred by CRG
in obtaining CRG’s letter of credit, to CRG and if, on the
other hand, it is finally determined by the Texas Court that the
amount the Company owes to CRG under the Loan Documents is less
than the Deposit Amount, CRG will pay such difference to the
Company and reimburse Cardinal Health 414 for the costs incurred by
Cardinal Health 414 in obtaining its letter of credit. Any payments
owing to CRG arising from a final determination that the Final
Payoff Amount is in excess of $59 million shall first be paid by
the Company without resort to the letter of credit posted by
Cardinal Health 414, and such letter of credit shall only be a
secondary resource in the event of failure of the Company to make
payment to CRG. The Company will indemnify Cardinal Health 414 for
any costs it incurs in payment to CRG under the settlement, and the
Company and Cardinal Health 414 further agree that Cardinal Health
414 can pursue all possible remedies, including offset against
earnout payments (guaranteed or otherwise) under the Purchase
Agreement, warrant exercise, or any other payments owed by Cardinal
Health 414, or any of its affiliates, to the Company, or any of its
affiliates, if Cardinal Health 414 incurs any cost associated with
payment to CRG under the settlement. The $2 million being held in
escrow pursuant to court order in the Ohio case and the $3 million
being held in escrow pursuant to court order in the Texas case were
released to the Company at closing of the Asset Sale. The Texas
hearing is currently set for July 3, 2017.
Platinum Credit Facility
In
connection with the closing of the Asset Sale to Cardinal Health
414, the Company repaid to PPCO an aggregate of approximately $7.7
million in partial satisfaction of the Company’s liabilities,
obligations and indebtedness under the Platinum Loan Agreement
between the Company and Platinum-Montaur, which, to the extent of
such payment, were transferred by Platinum-Montaur to PPCO. The
Company was informed by PPVA that it was the owner of the balance
of the Platinum-Montaur loan. Such balance of approximately $1.9
million was due upon closing of the Asset Sale but withheld by the
Company and not paid to anyone as it is subject to competing claims
of ownership by both Dr. Michael Goldberg, the Company’s
President and Chief Executive Officer, and PPVA.
As of
March 31, 2017, the outstanding principal balance of the Platinum
Note was approximately $1.9 million.
Summary
Our
future liquidity and capital requirements will depend on a number
of factors, including the final outcome of the CRG litigation which
could potentially result in payment of up to an additional $7
million to CRG, our ability to achieve market acceptance of our
products, our ability to complete the development and
commercialization of new products, our ability to monetize our
investment in non-core technologies, our ability to obtain
milestone or development funds from potential development and
distribution partners, regulatory actions by the FDA and
international regulatory bodies, the ability to procure required
financial resources, and intellectual property
protection.
Following
the completion of the Asset Sale to Cardinal Health 414 and the
repayment of a majority of our indebtedness, we believe that
substantial doubt about the Company’s financial position and
ability to continue as a going concern has been removed. The
Company is also working to establish additional sources of
non-dilutive funding, including collaborations and grant funding
that can augment the balance sheet as the Company works to reduce
spending to sustainable levels. Substantial progress on the
Manocept platform has resulted in several promising
opportunities.
We plan
to focus our resources for the remainder of 2017 primarily on
defending our position related to CRG’s claims of default and
development of products based on the Manocept platform. Although
management believes that it will be able to achieve these
objectives, they are subject to a number of variables beyond our
control, including the outcome of the remaining CRG litigation, the
nature and timing of any partnering opportunities, the ability to
modify contractual commitments made in connection with these
programs, and the timing and expense associated with suspension or
alteration of clinical trials, and consequently there can be no
assurance that we will be able to achieve our objective of bringing
our expenses in line with our revenues, and we may need to seek
additional debt or equity financing if we cannot achieve that
objective in a timely manner.
During
2016 and 2017 to date, we continued making limited investment in
the NAV4694 clinical trial process based on our expectation that we
will be successful in ultimately securing a partnership that will
provide us some level of return on this investment which is
incremental to the carrying costs we are presently incurring.
However, there can be no assurance that the partnership discussions
in which we are engaged will yield the level of return we are
anticipating.
We will
continue to evaluate our time lines, strategic needs, and balance
sheet requirements. There can be no assurance that if we attempt to
raise additional capital through debt, royalty, equity or
otherwise, we will be successful in doing so on terms acceptable to
the Company, or at all. Further, there can be no assurance that we
will be able to gain access and/or be able to execute on securing
new sources of funding, new development opportunities, successfully
obtain regulatory approval for and commercialize new products,
achieve significant product revenues from our products, or achieve
or sustain profitability in the future.
Recent Accounting Standards
In
January 2017, the FASB issued ASU No. 2017-01,
Business Combinations (Topic 805), Clarifying
the Definition of a Business
. ASU 2017-01 provides a screen
to determine when a set of assets and activities (collectively, a
“set”) is not a business. The screen requires that when
substantially all of the fair market value of the gross assets
acquired (or disposed of) is concentrated in a single identifiable
asset or a group of similar identifiable assets, the set is not a
business. If the screen is not met, ASU 2017-01 (1) requires that
to be considered a business, a set must include, at a minimum, an
input and a substantive process that together significantly
contribute to the ability to create output, and (2) removes the
evaluation of whether a market participant could replace missing
elements. ASU 2017-01 is effective for public business entities for
annual periods beginning after December 15, 2017, including interim
periods within those periods. ASU 2017-01 should be applied
prospectively on or after the effective date. No disclosures are
required at transition. Early adoption is permitted for certain
transactions as described in ASU 2017-01. Management is currently
evaluating the impact that the adoption of ASU 2017-01 will have on
our consolidated financial statements.
Critical Accounting Policies
We base our management’s discussion and analysis of financial
condition and results of operations, as well as disclosures
included elsewhere in this Quarterly Report on Form 10-Q, upon our
consolidated financial statements, which we have prepared in
accordance with U.S. generally accepted accounting principles. We
describe our significant accounting policies in the notes to the
audited consolidated financial statements contained in our Annual
Report on Form 10-K. We include within these policies our
“critical accounting policies.” Critical accounting
policies are those policies that are most important to the
preparation of our consolidated financial statements and require
management’s most subjective and complex judgment due to the
need to make estimates about matters that are inherently uncertain.
Changes in estimates and assumptions based upon actual results may
have a material impact on our results of operations and/or
financial condition.
Revenue Recognition.
We currently generate revenue primarily
from grants to support various product development initiatives. We
generally recognize grant revenue when expenses reimbursable under
the grants have been paid and payments under the grants become
contractually due.
We earn
additional revenues related to our licensing and distribution
agreements. The terms of these agreements may include payment to us
of non-refundable upfront license fees, funding or reimbursement of
research and development efforts, milestone payments if specified
objectives are achieved, and/or royalties on product sales. We
evaluate all deliverables within an arrangement to determine
whether or not they provide value on a stand-alone basis. We
recognize a contingent milestone payment as revenue in its entirety
upon our achievement of a substantive milestone if the
consideration earned from the achievement of the milestone (i) is
consistent with performance required to achieve the milestone or
the increase in value to the delivered item, (ii) relates solely to
past performance and (iii) is reasonable relative to all of the
other deliverables and payments within the
arrangement.
Research and Development.
Research and development
(?R&D?) expenses include both internal R&D activities and
external contracted services. Internal R&D activity expenses
include salaries, benefits, and stock-based compensation, as well
as travel, supplies, and other costs to support our R&D staff.
External contracted services include clinical trial activities,
chemistry, manufacturing and control-related activities, and
regulatory costs. R&D expenses are charged to operations as
incurred. We review and accrue R&D expenses based on services
performed and rely upon estimates of those costs applicable to the
stage of completion of each project.
Use of Estimates.
The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. We base these
estimates and assumptions upon historical experience and existing,
known circumstances. Actual results could differ from those
estimates. Specifically, management may make significant estimates
in the following areas:
●
Stock-Based Compensation.
Stock-based
payments to employees and directors, including grants of stock
options and restricted stock, are recognized in the statements of
operations based on their estimated fair values on the date of
grant, subject to an estimated forfeiture rate. The fair value of
each option award is estimated on the date of grant using the
Black-Scholes option pricing model to value stock-based payments
and the portion that is ultimately expected to vest is recognized
as compensation expense over either (1) the requisite service
period or (2) the estimated performance period. The determination
of fair value using the Black-Scholes option pricing model is
affected by our stock price as well as assumptions regarding a
number of complex and subjective variables, including expected
stock price volatility, risk-free interest rate, expected dividends
and projected employee stock option behaviors. We estimate the
expected term based on the contractual term of the awards and
employees' exercise and expected post-vesting termination behavior.
The restricted stock awards are valued based on the closing stock
price on the date of grant and amortized ratably over the estimated
life of the award.
Since
stock-based compensation is recognized only for those awards that
are ultimately expected to vest, we have applied an estimated
forfeiture rate to unvested awards for the purpose of calculating
compensation cost. These estimates will be revised, if necessary,
in future periods if actual forfeitures differ from estimates.
Changes in forfeiture estimates impact compensation cost in the
period in which the change in estimate occurs.
●
Fair Value of Financial
Instruments.
Certain of our notes payable are required
to be recorded at fair value. The estimated fair value of our
debt is calculated using a discounted cash flow analysis as well as
a probability-weighted Monte Carlo simulation. These
valuation methods include Level 3 inputs such as the estimated
current market interest rate for similar instruments with similar
creditworthiness. For the debt recorded at fair value,
unrealized gains and losses on the fair value of the debt are
classified in other expenses as a change in the fair value of
financial instruments in the consolidated statements of
operations.
●
Fair Value of Warrants.
We estimate the
fair value of warrants using the Black-Scholes model, which is
affected by our stock price and warrant exercise price, as well as
assumptions regarding a number of complex and subjective variables,
including expected stock price volatility and risk-free interest
rate.